By Dimitris Kontogiannis
Most pundits agree the Greek economy will have to rely more on private investments and exports to return to sustainable growth in the medium term. Privatizations have an important role to play in this endeavor, along with a strong, well-capitalized banking sector. However,given the seemingly strong foreign interest, the recent delay in Eurobank’s share capital increase is not a good omen. The partial privatization of the core bank should not be allowed to fall victim to any negotiating tactics between the Greek side and its creditors on the bailout program and the domestic political cost.
The Greek recession would have been less acute, despite the huge fiscal drag, if local banks could have performed their intermediary role and financed exports along with some investment projects. That did not happen. We argued a few weeks ago that the economy needs well-capitalized banks to help it on the road to recovery and sustainable growth rates in the medium term. That means local banks will have to clean up their balance sheets by bearing the brunt of future provisioning losses and proceed with fresh capital injections if necessary.
Eurobank, one of the four pillar banks, will have to undertake a share capital increase of about 2 billion euros or more. The bank, which is 95 percent-owned by the Hellenic Financial Stability Fund (HFSF), was planning to do so in February. The corporate action would have been preceded by the determination of its capital needs by the Bank of Greece based on BlackRock Solutions’ diagnostic tests on loan books and the approval of the new bank recapitalization law by Parliament.
However, the planned share capital agreement has been delayed until March. Insiders attribute it primarily to disagreements between Athens and the ECB on some parameters underpinning the stress tests which will affect the ensuing capital shortfalls. They also link the delay to the creditors’ dissatisfaction with unilateral Greek actions on fiscal matters such as keeping the reduced value-added tax rate for restaurants, the law on home foreclosures and the 2014 budget. Whatever the reason, the delay means the new bill on bank recapitalization, which reportedly allows for the share capital increase to take place at market prices, will have to be voted in Parliament closer to the European and local elections scheduled for May.
Undoubtedly, this is not a positive development for the part-privatization of Eurobank, the economy or the privatization agenda in general. This is because the share capital increase may become a point of political contention, and the rising political cost may postpone the vote on the new draft bill till after the May elections, even leading to its cancellation. We don’t think this is in the best interest of the country and should be avoided.
We think Greece should take advantage of the market’s upbeat mood about the Euro periphery and grab the money on the table because it may not be there in a few months from now. This way, the HFSF will not have to pay for Eurobank’s share capital increase – or if it does, just a small amount – preserving the 10- to 11-billion-euro buffer for other purposes. Readers are reminded the bailout program set aside close to 50 billion euros for the restructuring and the recapitalization of local banks. The remaining 10 to 11 billion euros could be used either for the banks’ future capital needs or/and partly filling the country’s 2014-15 financing gap, estimated at around 14 billion euros by the troika, according to recent reports.
Critics rightly point out that the HFSF’s 95 percent stake in Eurobank will be diluted if the share price is set at or close to 0.30 euros, a discount over the current market price. It is true the HFSF’s stake will be diluted around or below 50 percent according to analysts and it will initially suffer a loss of several hundred million euros since its average acquisition share price is around 1.25 euros after taking over the “good” Hellenic Postbank (TT). However, this is an accounting loss. The actual loss or gain will be realized later when the HFSF sells its shares.
The bank’s officials insists there is genuine interest from foreign funds, including Fairfax, to participate in the share capital increase. If so, it is reasonable to expect the HFSF’s initial loss to be cut as soon as the new shares start trading because they will likely rally on the success of the capital exercise and the part-privatization. This will likely benefit other banking stocks in which the HFSF has a majority stake, meaning the value of its stakes in the four core banks will rise.
Critics of the share capital increase at market price also argue against private participation so that the HFSF enjoys the upside when Eurobank starts producing the kind of profits envisioned and sells later. It is a valid argument but one should also take into account that projected future profits are uncertain and the foreign money may not be on the table at the time. Also, one should not underestimate the impact of the failure to partially privatize Eurobank on the Greek stock market on bonds and investor sentiment toward the country. In addition, the HFSF’s buffer will be reduced if it pays for Eurobank’s share capital increase of 2 billion euros or more and therefore less money will be available for other purposes.
Consequently it is important that the privatization agenda is advanced at a time the country needs foreign capital the most and the banking sector is strengthened by enhancing its capital to regain market confidence and access other forms of liquidity. Greece should pass Eurobank’s litmus test.